Walt Breitinger: California drought bumps dairy prices even higher

Drought drives dairy higher

Milk futures are near an all-time high as California suffers through a severe drought that is threating dairy production.

Although many Americans think of Wisconsin as the center of U.S. dairy, California actually produces the most milk. Other major producing states like Idaho, Texas and New Mexico are also seeing their pastureland dried out, which reduces cows' ability to produce milk.

As a result of lower production outlooks, milk futures have risen 40 percent in the last six months. As of midday Friday, the most commonly traded dairy contract, Class III milk for delivery in March, was trading for 22.73 cents per pound, a record high.

Longer-term, prices may be affected more significantly by government policy. Of primary interest to the milk industry is a recent farm bill which reduced milk subsidies to farmers while increasing insurance coverage. The same bill also contained funding cutbacks to the Supplemental Nutrition Assistance Program ("food stamps"), which could reduce future demand for dairy products.

Hog market sizzles

Pork prices continued to explode this week, reaching an all-time high as concerns spread about a virus killing baby pigs. Attempts to contain the spread of the virus have been largely unsuccessful so far; the virus has killed millions of piglets over the last year and is currently identified on farms in half of U.S. states.

The virus is not known to have an impact on human health, but since the virus is killing young pigs, it is expected to have a long-term impact on pork supplies, pushing futures prices sharply higher, especially for the summer months, when grilling demand is typically highest. As of midday Friday, lean hogs for delivery in June stood at an all-time of $1.20 per pound.

Already under pressure from the virus, some hog producers are also in trouble because they pre-sold their pork production at much lower prices. As prices rise, they are missing out on potential profits and could end up with significant losses if they can't meet their production promises.

Palladium shines amid Ukraine crisis

As the crisis in Ukraine continues, the United States and European allies continue to threaten economic sanctions against Russia, which is boosting prices for many commodities, including palladium. Russia is the world's largest miner of palladium, a metal which is predominantly used in catalytic convertors in automobiles. Fears of a trade standoff with Russia helped push palladium prices to a one-year high this week at $785 per ounce.

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Walt Breitinger: California drought bumps dairy prices even higher

Milk futures are near an all-time high as California suffers through a severe drought that is threating dairy production.

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